Appendix I. Benchmark Model
An econometric model of determinants of corporate cash holdings was estimated for a panel of 3,412 nonfinancial Japanese firms for the 14 years between 2000 and 2013 (or less, depending on availability). We conducted regression using both fixed and random effects, as well as Arellano-Bond estimation with two lags.
Our dependent variable is cash and cash equivalent in percent of market capitalization, available from Bloomberg.
Explanatory variables and data sources are as follows:
The proxy for corporate governance is the “Proprietary Bloomberg Score”, an index which ranges from 0.1 for companies that disclose a minimum amount of governance data to 100 for those that disclose every data point collected by Bloomberg. Each data point is weighted in terms of importance, with board of directors data carrying greater weight than other disclosures. The score is also tailored to different industry sectors. In this way, each company is only evaluated in terms of the data that is relevant to its industry sector.
Common stock (which enters the regression in logarithmic form), value of common stock as reported by the company, from Bloomberg.
Number of employees of the firm (which enters the regression in logarithmic form), from Bloomberg.
Cash conversion cycle defined as Inventory Turnover Days + Account Receivable Turnover Days - Accounts Payable Turnover Days, from Bloomberg.
Capital expenditure (which enters the regression in logarithmic form), from Bloomberg.
Debt-to-equity ratio, defined as the sum of short term and long term borrowings divided by total shareholder’s equity, multiplied by 100 from Bloomberg.
Free cash flow per share, calculated as free cash flow (cash from operations - capital expenditures) divided by the average basic number of shares for the period, from Bloomberg.
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)| false Nakano, Makoto, and Yusuke Takasu, 2013, “ Nihon kigyo no genkin hoyu kettei youin bunseki- shoyu kouzou to torishimariyakukai tokusei no shiten kara” (Determinants of Japanese Companies’ Cash Holdings – From the point of view of the board of directors and ownership structure characteristics). HERMES-IR No.161 ( Tokyo: Hitotsubashi University).
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We are grateful to Nobuyuki Kinoshita for very useful discussion. We also thank for comments Dennis Botman, Stephan Danninger, Jerry Schiff, and participants in the IMF seminar held in Tokyo on “Towards a more dynamic business sector”. All opinions and remaining errors are ours.
“In a state of deflation, the holding of cash or deposits will become a relatively better investment. In fact, cash and deposits held by Japanese firms have reached 230 trillion yen, close to 50 percent of nominal GDP. Persistent deflation has created an environment in which the status quo is better than making investment in new initiatives, and has brought a sense of stagnation to Japan.”, in “Overcoming Deflation: The Bank of Japan’s Challenge” available at http://www.boj.or.jp/en/announcements/press/koen_2013/ko131010a.htm/
These three variables enter the regression in logarithmic form.
Central to the calculation of the JPX-Nikkei Index 400 is a three-year-record of return on equity employed (ROE), along with various qualitative measures of corporate governance, such as independent directors and reports in English.